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Thursday, June 26, 2008

Know Tomorrow's Price Action Today (As well as the explanation)

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Stock traders, stock market followers, investors, forex tradings, and money makers:

First let me start by saying that today was great money making day, and also that the positions entered into at the end of the day are already profitable.

NDX is up in after hours, and EUR/USD is made already 25 pips as I type this (read my post of earlier today where I indicated I am shorting it in area of 1.5760 and it is now in area of 1.5635).

Now the main elements of this post.

If you want to make money in the market, you need to see what the majority do not see. You need to be different, unique, and even "weird" in the minds of the majority.

Let me gives examples:

1. Yesterday (Thursday) I wrote that the market (NDX) should be shorted when it was at 1949. At that moment (in a public forum) I was told that I was crazy and that I have just put a noose around my own neck to be killed.

The forum is not a place for average Joe. It is a place where the elite of traders get together. Not only that, but the thread where the discussion took place is one of the top threads of all time, which calls the market using a system developed by a trader who states that he earned many world championship.

I was lonely in my market call. But to earn in trading you need to learn to be lonely.

Today we know what happened. The market tanked : NDX lost 96 points from the point I wrote it should be shorted just less than seven hours of trading before that happened. That is close to 5% on a major index!

2. I also wrote today that the market should bought at the close. The after hours trading showed that it was a correct decision.

3. I also wrote the rationale behind all these trades, and explained that shorting EUR/USD makes sense in this picture.

There technical and fundamental arguments behind all this. If I were speaking to you face to face, I would explained it to you in simple terms and fast. But since I cannot let me take just a little piece of it.

The price goes up to find sellers and down to find buyers. The place where it makes a U turn is the place where the strong sellers and the strong buyers.

Now what you need to know to know how to determine the location of strong sellers and strong buyers.

In addition these buyers and sellers (like fighting armies) are not going to stay static (stay put). The move in the price and time space.

My job is to locate them.

Now I analyzed EUR/USD and find that the price was in the neighborhood of strong sellers. This means that EUR/USD should re-treat.

During a retreat of this pair, the dollar would appear stronger, and therefore commodities will stop rising or just not move too much up.

This change in dynamics can create a "reason" for people to buy equities (or at least stop selling). Therefore it is a reason for prices in equities to stop going down for just few hours.

That is one of the reasons why I thought that tomorrow morning equities will either open up, or if they open down a morning rally will follow.

Consequently I opened and carried the half position size I explained in an earlier post.

Now the other reasons. The price of equities has move to a point where there are some buyers. But there is something else.

Imaginge for a moment that you were a short seller today. What would you do tomorrow? Well you could say I get step on the side and see what happens first before playing it on the short side. You could say, I will first wait for a bounce.

There are many people outthere who think like in the previous paragraph, and who have been selling short today.

Once all those people are on the sideline, and if the buyers do not move to the side, then buying pressure might overcome the selling pressure, and a morning rally can follow.

If the morning rally follow, what is interesting is that it may even continue to go up because shortseller who did not cover may start covering and the momentum can continue.

But if they open up the price up, then (unless it triggers short covering) the short sellers may start their work of selling and the price heads south.

But if price opens lower than the low of Thursday (today of yesterday depending on when your reading this), then the selling pressure will be less and the buying pressure may be greater.

In addition to NDX, the other area I am looking at is XLF (financial sector). My analysis tells me that we have short term bottom in the area of 20. And since we just 80 cents away some buyers may step ahead and start accumulating.

Now I want you to understand that the above analysis is valid only for tomorrow morning!

The overall daily trend is down, and the prudent and smart way to trade this market is to wait for rallies to prudent places to enter and then short.

First rule is safety. If there is a second rule, it is the first rule. Profits take care of themselves. The job of a trade is to take care of losses in two steps:

1. Avoid them at entry using various techniques.
2. If he cannot do one, then manage the bleeding.
3. And once a trade is profitable, the job of the trader becomes to make the trade in terms of gain locking.

Needless to say that a trader should only play speculation with no more than 20% of his total money in the market, and never allocate more than 5% of that money to single trade. Therefore a trade should play with only 1% of his money on any one trade.

I do not know whether you really have the above sinked in your mind, but I believe the majority do not understand that.

I hope the above was not too long and difficult to understand, but I just felt to write some raw thinking before I head to bed.

Happy trading,

PS: email me at . Empty emails are fine. I will add you to the by invitation blog, and the list of people I email tips to.

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Happy trading,


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